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MARKET SEGMENTATION AND THE RESPONSE OF THE REAL INTEREST RATE TO MONETARY POLICY SHOCKS

Published online by Cambridge University Press:  01 November 2008

Filippo Occhino
Filippo Occhino*
Affiliation:
Rutgers University
*
Address correspondence to: Department of Economics, Rutgers University, 75 Hamilton Street, New Brunswick, NJ 08901, USA; e-mail: occhino@rutgers.edu.
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Abstract

Following a contractionary monetary policy shock, the aggregate output decreases over time for six to eight quarters, while the real interest rate increases immediately and remains high for three quarters, which can hardly be replicated by models characterized by a standard consumption Euler equation. This paper adopts a segmented markets framework where some households are permanently excluded from financial markets. The aggregate output and the nominal interest rate are modeled as exogenous autoregressive processes, while the real interest rate is determined endogenously. For intermediate levels of market segmentation, the model is able to account for both the persistent decreasing path of the aggregate output and the persistent increase in the real interest rate which follow an unanticipated increase in the nominal interest rate. The sign, the size and the persistence of the responses of the real interest rate and the money growth rate are close to those in the data.

Keywords

Limited ParticipationMarket SegmentationMonetary Policy ShocksReal Interest Rate
Type
Articles
Information
Macroeconomic Dynamics , Volume 12 , Issue 5 , November 2008 , pp. 591 - 618
Copyright
Copyright © Cambridge University Press 2008

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